Fall 2016: Quarterly economic update

December 13, 2016

The Institute provides an update on the key economic indicators that matter most to Ontarians. Included are updates on: GDP growth, inflation, housing prices, job growth, unemployment, international trade, and the future outlook for both the Ontario and Canadian economies.

GDP Growth

In the Institute’s Summer 2016: Quarterly economic update, Ontario’s economy was forecasted to shrink by 0.3 percent in 2016 Q2. Fortunately, the province outperformed its forecast and grew by 0.2 percent. Forecasted growth for Q3 is strong at 0.8 percent; and moderately strong growth is expected moving forward over the next couple of years.

In 2016 Q2, Canada experienced its worst quarter since the financial crisis—real GDP contracted by 0.3 percent. The wildfires contributed significantly to this poor performance. However, the economy rebounded strongly and experienced 0.9 percent growth in Q3.

Inflation

While consumer price inflation is low this quarter, the same cannot be said about the housing market.

Again this quarter, inflation in the Toronto and Vancouver markets outpaced the Canadian average. However, things are about to change. Vancouver’s newly implemented foreign buyers tax and the recently announced vacancy tax are cooling the market. A significant portion of speculative real estate investment is expected to be redirected to Seattle, Toronto, and other North American cities. Most recently, housing prices in Vancouver flattened and then began to fall in September and October. In the GTA, prises increased by 2 percent in the month of October alone. (Note: Over the past six years, prices have never increased by more than 0.77 percent in the month of October).

Vancouver addressed critical issues in its housing market head-on through the introduction of specific new taxes. The foreign buyers tax reduced speculative real estate investment and the vacancy tax will help increase the availability or rental housing starting next year. These policies increase the tax burden, which reduces the demand for houses and consequently cools the market.

In contrast, Ontario’s policies to help with affordability, such as increasing the land transfer tax refund and freezing the property tax burden on apartment buildings, ultimately increase the demand for houses. If anything, these new policies will heat the market and fail to address the root cause of housing price inflation. Ontario must better understand the market forces driving prices in the province, and especially the GTA. Failure to address these forces will likely result in prices rising at an even faster rate.

Job growth and unemployment

Unemployment

With a 6.6 percent unemployment rate, Ontario maintains its position below the national average of 7.0 percent. British Columbia and Québec experienced significant improvements this quarter as the unemployment rate fell from 7.2 down to 7.0 percent in Québec, and from 5.9 percent to 5.6 percent in British Columbia. Alberta, on the other hand, continues to face challenges. The unemployment rate jumped to 8.5 percent—the highest it has been since 1994 Q3.

Job growth

Canada as a whole gained 12,733 jobs in the third quarter, but the composition of these jobs is less than optimal. The country lost 35,500 full-time jobs, and gained 48,233 part-time jobs.

Ontario lost over 19,000 jobs, nearly split 50-50 between full-time and part-time positions. In comparison to last quarter, this time the goods-producing sector outperformed the service-producing sector, enjoying employment gains in the manufacturing, construction, and utilities sectors.

The only way a region can lower its unemployment rate while losing jobs (which is the case for Ontario in 2016 Q3), is for the participation rate to decline. In 2016 Q3, the participation rates of young (ages 15-24), middle aged (ages 25-54), and older (ages 55+) Ontarians each took a slight dip. While the drop is not too significant, it must be monitored, as declining participation rates can provide insight into important economic conditions and trends. For example, a decrease in 15-24 year olds’ participation rate may indicate an increase in educational enrollment; a decrease for older workers 55+ may indicate skills obsolescence; and a decrease in middle aged workers could signify numerous weaknesses in the labour market.

On a more positive note, recently released labour force data for October and November show employment increasing and a reduction in the unemployment rate in Ontario.

Trade

Export levels can be subject to seasonal variation. For this reason, the Institute evaluates quarterly export performance against the corresponding quarter of the previous year.

Over the past several quarters, Ontario’s exports were outperforming the previous year. However, this growth is slowing down. In 2016 Q3, exports were only up 1.3 percent over 2015 Q3. The province’s export growth is no longer benefiting from a depreciating Canadian dollar, which is now relatively stable in the range of 75 to 78 cents US.

As usual, Ontario’s merchandise exports are being led by its prominent export-oriented industries: automotive, mining, and medicine manufacturing. For more information, see the Fifteenth Annual Report where we perform an in-depth analysis of the threats and opportunities facing each of these industries.

Québec and Canada experienced small contractions in exports, 4.2 and 4.8 percent, respectively. Out west, British Columbia saw an impressive 8.2 percent boost in exports. Alberta, on the other hand, continues to struggle with exports down 19.1 percent over the previous year.

Outlook

Both the Canadian and Ontario economies are rebounding strongly following a weak second quarter. Consumer price inflation is under control but there is uncertainty around future developments in the GTA’s housing market. Job creation and exports have been strong in recent quarters; and despite a blip in 2016 Q3’s employment levels, recent data suggests employment growth is back on track.

The medium-term outlook is bright. For the next couple of years, private sector forecasts predict real GDP growth of over 2 percent per year for both the Canadian and Ontario economies.